Rule 1 (To Becoming Wealthy)

LukeLewis

LukeLewis

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What's the rule to become wealthy? It's this: you first need to learn the difference between an asset and a liability and you then need to spend the rest of your life purchasing assets. Now, I know what you're going to do right now. First, you're going to disagree with the rule and then you're going to look up the definitions for assets and liabilities. That's what I did when I first learned this. Really though, it's that simple. This is the only rule you need to follow to become rich. And the longer you have in life to follow this rule, the better the chances are that you'll stand out from the rest of humanity. Just ask anyone who invested in an index fund in 1990. They've got plenty of money today.

I'll tell you right now that if you do happen to search for the definitions of assets and liabilities, you'll most likely find the "accounting" definitions, which, if you dig far enough into them, are somewhat accurate. For for the purposes of this book though, I'll break down what Mike's father used as definitions compared to the accounting definitions. I'll list the accounting definitions next and then in another post, we'll discuss the much more simplistic "get rich" definitions.

Asset: In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be utilized to produce value and that is held by an economic entity and that could produce positive economic value. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).

Liability: In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

To accountants, a company's logo is an asset because it, if it's been marketed and branded well in the past, holds value. A piece of machinery is an asset. A building is an asset. As far as liabilities go, bank and mortgage debt are good examples. So are wages payable, taxes payable, and accounts payable. To Mike's father though, these aren't exactly helpful definitions and if, as an average person, you use them in your attempt to become wealthy, you'll likely go broke. Again, I'll get to those other definitions below.

So let me ask you something. If learning a few definitions and a simple rule can make you tons of money over a lifetime, why don't more people simply follow the rule to become rich? I'll tell you why and this comes from personal experience. First, a lot of people really aren't that intelligent. They try to follow the rule and the definitions, but get themselves in trouble because they default back to what they originally knew the definitions to be. Simply put, they end up buying a lot of liabilities and they lose all their money. They actually put themselves in a worse spot than they were in when they began. Second, many people don't have a good business sense. Yes, there are many assets someone can purchase that would make them money just by sitting there, but there are also many assets that require you do something with them. And since the person who purchased the asset that needs tending to has no idea of the necessary next steps, they fail in their endeavor. And finally, some people are so smart, they get in their own way. They over analyze the entire thing, consult attorneys and accountants, purchase their neighbor's house to use as a rental property, and go broke doing it. It's supposed to be simple, not drive you up a wall. I've witnessed all three of these types of people do stupid things though my entire life.

In this section of the book, after Robert questions Mike's father about what I just explained above, Mike's father indicates that people need to follow the numbers more. And not only that, they need to follow what the numbers mean. They need to comprehend them. Just as if someone were reading something (literature). Yes, we can read a bunch of words in a book when we're half asleep, but those words will have no meaning because there was no comprehension behind them. If someone reads numbers on financial statements, but has no idea how they relate to profitability or loss, they'll be in just as bad a position as when they began. so in order for people to become wealthy in life, they not only need to follow rule number 1, they also need to become financially literate.

This post is part of a series: Rich Dad Poor Dad by Robert T. Kiyosaki
 
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Rule 1 (To Becoming Wealthy) was posted on 06-05-2021 by LukeLewis in the Finance Forum forum.

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